Airfares Could Rise Next Year as Carriers Face Rising Costs

by Barbara Peterson
Airfares Could Rise Next Year as Carriers Face Rising Costs

Photo: Delta


Major airlines reported third quarter profits for 2017, but while virtually all carriers were in the black, the financial outlook for the industry is more challenging than it was earlier this year, analysts say.

In short: get ready for a round of fare hikes, as airlines seek to pass along rising operating costs to customers.

In recent weeks, American, Delta, Southwest and United all reported strong earnings for the most recent quarters, but also raised some red flags. While carriers weathered the effects of Hurricanes Irma and Maria without serious damage to their bottom lines, they are facing higher costs following a round of labor contracts that yielded pay hikes for pilots and other employee groups.

American, for example, told analysts that it expected costs in the last quarter of 2017 to rise significantly, although that should ease somewhat next year. Meanwhile, Southwest, for its part, was bullish on the outlook, with CEO Gary Kelly telling analysts that despite numerous challenges, “it was a very strong quarter, and fourth quarter looks better.”

Both of the Texas-based carriers narrowly beat Wall Street’s profit forecast for the quarter.

The price of jet fuel, the airlines’ biggest expense after labor, is also going up, but more efficient aircraft in carriers’ fleets should lessen the impact. And airlines are making significant investments to upgrade their product; purchasing new planes and refurbishing airport terminals, such as Delta Air Lines’ $4 billion upgrade of its digs at New York’s aging LaGuardia Airport.

The industry is still highly competitive
According to Rajeev Lalwani, an analyst at Morgan Stanley, the combined impact of these factors will raise airlines’ costs by up to 2 percent in 2018, excluding fuel. Airline fares could rise by more than that, especially in markets with less competition. But in general, air fares on average are about $10 lower this year than a year ago, suggesting that the industry is still highly competitive, says Airlines for America economist John Heimlich.

Major network carriers like United, of course, traditionally have had higher costs than their smaller rivals like JetBlue. But in recent years they have bucked conventional wisdom and have slashed expenses and raised revenue through ancillary services like bag fees and ticket changes. Recent data from the IdeaWorks consulting firm shows that the Big Three legacy lines – American, Delta and United – raked in more than $16 billion collectively in ancillary fees in 2016.

Still, industry officials say that while the mega-carriers that emerged from a round of mergers in the past decade may benefit from their large size, that is not enough to ensure profits in what has always been a tough industry. “The reality is that legacy carriers still have very high costs, and consolidation didn’t really improve the cost structure,” Spirit Chief Executive Bob Fornaro said in a quarterly earnings call. “It improved the networks, but the costs are going higher.” 

Of course, budget airlines like Spirit and Frontier are champions of the a la carte approach to pricing, but even with their low costs, they are facing similar challenges. Pilots at Spirit are demanding higher pay in contract negotiations that have already dragged on for two years.  

Individual carriers are also facing additional expenses stemming from their mergers. United, for example, expects technology costs to rise next year as it finally integrates its IT systems with Continental’s. And Alaska is on track to absorb Virgin America into its system, ultimately retiring the latter’s brand.

  1
  1
Tip of the Day
Daily Top List

Five Best Travel Destinations to Visit Between Seasons

1. Zambia

2. Fiji

3. Rome

4. Hawaii

5. Niagara

Source: GQ

TMR THIS WEEK
http://services.travelsavers.com/AMGService.svc/REST/GetImage?ImageID=01e53f1d-84ba-e811-ba59-782bcb66a2f2

Here Are the ABCs of Guided Independent Travel

It's not escorted and it's not independent travel, so what's the lowdown on this increasingly popular guided independent travel segment?

TMR Recommendations
Top Stories
American Airlines Joins Rivals in Raising Bag Fee to $30 as Congress Eyes Regulating Charges
American Airlines Joins Rivals in Raising Bag Fee to $30 as Congress Eyes Regulating Charges

American matched prior increases by United, Delta, and JetBlue.

Delta Air Lines Joins Others in Raising Bag Fees
Delta Air Lines Joins Others in Raising Bag Fees

The increases are becoming industrywide as more and more major airlines follow suit.

ASTA Warns FAA Bill Could Impose Harmful Regulations on Travel Agencies
ASTA Warns FAA Bill Could Impose Harmful Regulations on Travel Agencies

The organization estimates the potential economic impact on the industry to be nearly $30 million a year.

United Airlines is Changing its Boarding Process
United Airlines is Changing its Boarding Process

The airline says the new boarding process will make it easier, and less stressful, for passengers to get onboard.

Sabre Expands Beyond NDC Program
Sabre Expands Beyond NDC Program

New partners include United Airlines, BCD Travel, American Express Travel, and more.

Touting Success, TSA Plans to Expand 3D Carry-On Scanners
Touting Success, TSA Plans to Expand 3D Carry-On Scanners

The quicker pace of screenings, coupled with requiring travelers to take out less from their bags, would ease the congestion plaguing long security lines at airports.

News Briefs
TMR Report Cards
Advertiser's Voice
Advertiser's Voice: Norwegian Cruise Line